Edited version of private advice

Authorisation Number: 1052242797453

Date of advice: 30 April 2024

Ruling

Subject: Commissioner's discretion - employee share schemes

Question

Will the Commissioner allow the minimum holding period for the Employee Scheme Options Plan interests to end at an earlier time, being the Date of Sale, pursuant to paragraph 83A-45(5)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2022

Year ended 30 June 2023

Year ending 30 June 2024

The scheme commenced on:

1 July 2021

Relevant facts and circumstances

Employees of the Company A were granted options (the options) under the Company's Employee Scheme Options Plan (the plan).

The options were granted on the basis that the terms of offer of these options and the Company A would meet the conditions for the startup tax concessions set out in section 83A-33 of the Income Tax Assessment Act (ITAA 1997).

The options were to vest over three years.

A number of employees were granted the options at various times, from November 20XX.

All options cannot be disposed of for a period of three years after the issue of the option or such earlier time as the Commissioner of Taxation allows in accordance with subsection 83A-45(5) of the ITAA 1997.

The Company A has not allowed any option holder to dispose of their options.

Any of the option-holder do not dispose their options.

In 20XX, the Company B and the Company A signed a written, non-binding Head of Agreement for the Company B to acquire 100% of the Company's A shares (the transaction).

The transaction was an Exit Event under the plan. All membership interests in the Company A were disposed of under an agreement, as a 100% sale of the Company's A shares.

The Share Purchase Deed (SPD) in relation to the transaction was signed in 20XX (Date of Sale).

The SPD contemplates that the vested options would be exercised immediately prior to the completion of the transaction.

Option-holders have received the Company's A shares and signed a deed of accession to the Company's A shareholder agreement.

Option-holders are parties to the SPD as a seller.

All shares in the Company A were acquired by the Company B following the satisfaction or waiving of all conditions precedent to the SPD.

All option shares were disposed under the SPD for cash or in exchange for replacement shares in the Company B pursuant to CGT rollover. These disposals will all occur within three years of the date of grant of options.

The Plan - relevant clauses

X.X Overriding restriction on Disposal in first 3 years

Unless an Eligible Person (or Nominee) disposes of an Option or an Option Share under an arrangement which meets the requirements in section 83A-130 of the Tax Act, a legal or a beneficial interest in an Option or an Option Share may not be disposed of until the earlier of:

(a) 3 years after the issue of the Option or such earlier time as the Commissioner of Taxation allows in accordance with section 83A-45(5) of the Tax Act; and

(b) the date that the Eligible Person ceases to be employed or engaged by a Group Company.

X. Procedure on Exit Event

X.X Treatment of unvested Options on Exit Event

(a) All unvested Options will automatically lapse on the occurrence of the Exit Event, unless otherwise determined by the Board.

X.X Treatment of Outstanding Options on Exit Event

(a) Prior to an Exit Event, the Board must notify an Option Holder of the upcoming Exit Event and provide reasonable details of the Exit Event.

(b) If on the occurrence of the Exit Event, an Option Holder has been employed or engaged by a Group Company for:

(i) less than 24 months, then all Outstanding Options automatically lapse, unless otherwise determined by the Board;

(ii) more than 24 months, then the Board must either:

(A) cancel some or all of the Outstanding Options by paying the Option Holder the amount per Ordinary Share that will be paid under the Exit Event, less the Option Holder's proportionate share of transaction costs; or

(B) make appropriate arrangements to ensure that all Outstanding Options are able to be exercised on or prior to the Exit Date and use reasonable endeavours to ensure that the Option Shares issued at or about the time of an Exit Event are accorded the same rights and receive the same benefits in relation to the Exit Event as pre-existing Ordinary Shares.

(C) If the Board undertakes the action set out in rule X any Outstanding Options as at the date of completion of the Exit Event automatically lapse on completion of the Exit Event.

The plan constituted an 'employee share scheme' under section 83A-10 of the ITAA 1997.

Any option or share acquired pursuant to the plan constituted an 'ESS interest' under Division 83A of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 section 83A-10

Income Tax Assessment Act 1997 subsection 83A-45(4)

Income Tax Assessment Act 1997 subsection 83A-45(5)

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iv a general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidancerule for income tax'.

Reasons for decision

All references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise noted.

The minimum holding period requirement is explained in subsections 83A-45(4) and (5), which state:

(4) This subsection applies to an ESS interest you acquire under an employee share scheme if, at all times during the interest's minimum holding period, the scheme is operated so that every acquirer of an ESS interest (the scheme interest) under the scheme is not permitted to dispose of:

(a) the scheme interest; or

(b) a beneficial interest in a share acquired as a result of the scheme interest;

during the scheme interest's minimum holding period....

(5) An ESS interest's minimum holding period is the period starting when the interest is acquired under the employee share scheme and ending at the earlier of:

(a) 3 years later, or such earlier time as the Commissioner allows if the Commissioner is satisfied that:

(i) the operators of the scheme intended for subsection (4) to apply to the interest during the 3 years after the acquisition of the interest; and

(ii) at the earlier time that the Commissioner allows, all membership interests in the relevant company were disposed of under a particular scheme; and

(b) when the acquirer of the interest ceases being employed by the relevant employer.

The Explanatory Memorandum for the Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015 explains the introduction of the Commissioner's discretion in subsection 83A-45(5) as follows:

1.82 This Bill makes slight improvements to the existing minimum holding period condition by allowing the Commissioner to reduce the minimum holding period in situations in which all employees are effectively required to exercise and/or dispose of their ESS interests. For example, where there is an initial public offering of the company, or the company is subject to a full trade sale and employees have agreed to a 'tag along' clause in relation to holding of minority interests. The Commissioner in applying the discretion will need to have regard to whether, when employees acquired their interest, there was a genuine intention for the interests to be held for the minimum holding period.

Application to your circumstances

All the membership interests in the Company A were acquired under the acquisition, thus satisfying subparagraph 83A-45(5)(a)(ii).

In exercising his discretion, the Commissioner must also consider, under subparagraph 83A-45(5)(a)(i), whether the operators of the scheme genuinely intended for the options to be held for the minimum holding period.

The operators of the scheme may fail the test if they had either allowed a participant to dispose of their interest prior to the end of its minimum holding period or there was objective evidence that the scheme was not operated to prevent the participants from doing so.

The provided plan contains the relevant clauses for disposals of a legal or beneficial interests in options and option shares. The plan contains an overriding restriction on any disposal in the first 3 years, unless the Commissioner allows an earlier time by exercising his discretion, which reflects the minimum holding period provided for in section 83A-45. The relevant clause in the plan is designed to ensure the plan complies with the minimum holding period requirements in subsections 83A-45(4) and (5).

The Commissioner is satisfied that the plan prevented employees disposing of options acquired until the earlier of the 3-year anniversary of the date the options were granted or the day after the date they ceased to be employed by the company. The plan did not provide for an exemption from or non-compliance with this rule and there is no evidence to suggest that the Company A (or its Board), as operators of the plan, did not intend for every option-holder under the plan to be restricted from disposing their options for that minimum holding period.

Further, all options were acquired by the employees under the plan prior to the Company A having been approached by the Company B and having entered into any negotiation with the Company B regarding the acquisition of all the Company's A issued capital under the transaction.

Accordingly, the Commissioner is satisfied that the requirements of subparagraphs 83A-45(5)(a)(i) and (ii) are met and will allow the minimum holding period for the plan interests to end at an earlier time, being the Date of Sale.